Currency Hedging Makes a Difference in Emerging Markets

Emerging markets currencies are getting plenty of attention these days and most of it is bad. Put the phrased “emerging markets currencies contagion” into Google and a tidy 13.5 million results are returned in a third of a second.

“Contagion” may be overused as a way of describing the current state of affairs with developing world currencies, but it is not inaccurate. The WisdomTree Emerging Currency Strategy Fund (NYSEArca: CEW) is off 2.3% in the past month currencies across the emerging world have stumbled on renewed fears of Federal Reserve tapering. [Emerging Currencies Tumble]

If there is a glimmer of hope for investors looking to grab emerging markets bargains it is this: The hedged-currency theme that rose to acclaim last year due in large to Japan ETFs works with emerging markets funds. That is to say the db X-trackers MSCI Emerging Markets Hedged Equity Fund (NYSEArca: DBEM) has been noticeably less bad in recent weeks than its unhedged rivals, the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO).

Here is a one–month chart of that trio. Obviously, there is nothing to write home about there, but DBEM has clearly outperformed/been less offensive than EEM and VWO.